UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 1996
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-22102
CYGNE DESIGNS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 04-2843286
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1372 Broadway, New York, New York 10018
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Address of principal executive offices) (Zip Code)
(212) 354-6474
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value, 12,438,038 shares as of September 12, 1996.
Cygne Designs, Inc. and Subsidiaries
Index to Form 10-Q
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
Condensed Consolidated Balance Sheets at August 3, 1996
and February 3, 1996 3
Condensed Consolidated Statements of Operations for the
three and six months ended August 3, 1996 and July 29, 1995 4
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended August 3, 1996 5
Condensed Consolidated Statements of Cash Flows for the three
and six months ended August 3, 1996 and July 29, 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
-2-
Part I. Financial Information
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
($ in thousands, except share amounts)
(Unaudited)
August 3, February 3,
1996 1996
--------- -----------
ASSETS
Current assets:
Cash $ 2,815 $ 5,487
Trade accounts receivable, net 32,602 35,117
Inventory 21,937 29,999
Other receivables and prepaid expenses 4,773 8,150
Assets held for sale -- 15,200
Deferred income taxes 4,081 4,066
--------- ---------
Total current assets 66,208 98,019
Fixed assets, net 13,151 13,533
Other assets 848 803
Deferred income taxes 2,000 2,000
Goodwill, net 2,608 2,790
--------- ---------
Total assets $ 84,815 $ 117,145
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 19,586 $ 37,453
Accounts payable 21,874 32,928
Trade credit facilities outstanding 9,364 8,945
Accrued expenses 9,322 14,083
Income taxes payable 6,259 5,677
Current portion of long-term debt 1,930 2,047
--------- ---------
Total current liabilities 68,335 101,133
Long-term debt 1,192 1,562
Deferred rent credits 1,513 1,386
--------- ---------
Total liabilities 71,040 104,081
Minority interests in subsidiaries 4,749 4,018
Stockholders' equity:
Preferred stock, $0.01 par value;
4,000,000 shares authorized, none
issued and outstanding
Common stock, $0.01 par value;
75,000,000 shares authorized;
12,438,038 shares issued and outstanding 124 124
Paid-in capital 120,918 120,918
Accumulated deficit (112,056) (111,999)
Foreign currency translation adjustment 40 3
--------- ---------
Total stockholders' equity 9,026 9,046
--------- ---------
Total liabilities and stockholders' equity $ 84,815 $ 117,145
========= =========
See accompanying notes.
-3-
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
---------- ---------- ---------- ---------
(In thousands, except per share amounts)
Net sales $ 75,886 $ 132,067 $ 159,642 $ 260,434
Cost of goods sold 66,212 119,391 139,256 236,630
--------- --------- --------- ---------
Gross profit 9,674 12,676 20,386 23,804
Selling, general and administrative expenses 8,178 16,155 17,337 34,333
Gain from sale of subsidiary, net -- -- -- (4,742)
Bad debt expense -- -- -- 1,030
Amortization of intangibles 91 965 182 1,921
--------- --------- --------- ---------
Income (loss) from operations 1,405 (4,444) 2,867 (8,738)
Other income 166 -- 554 --
Interest expense 995 2,479 1,930 4,590
--------- --------- --------- ---------
Income (loss) before provision for income
taxes and minority interests 576 (6,923) 1,491 (13,328)
Provision (benefit) for income taxes 381 (2,292) 817 (4,414)
--------- --------- --------- ---------
Income (loss) before minority interests 195 (4,631) 674 (8,914)
Income attributable to minority interests 283 424 731 821
--------- --------- --------- ---------
Net loss $ (88) $ (5,055) $ (57) $ (9,735)
========= ========= ========= =========
Net loss per share $ (0.01) $ (0.41) $ 0.00 $ (0.77)
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding 12,438 12,438 12,438 12,662
========= ========= ========= =========
See accompanying notes.
-4-
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands)
Common Stock Foreign
------------------------ Currency
Number Paid-in Translation Accumulated
of Shares Amount Capital Adjustment Deficit Total
--------- --------- --------- --------- --------- ---------
Balance at February 3, 1996 12,438 $124 $120,918 $ 3 $(111,999) $9,046
Foreign currency translation
adjustment -- -- -- 37 -- 37
Net (loss) for the six
months ended August 3, 1996 -- -- -- -- (57) (57)
------ ---- -------- ---- --------- ------
Balance at August 3, 1996 12,438 $124 $120,918 $ 40 $(112,056) $9,026
====== ==== ======== ==== ========= ======
See accompanying notes.
-5-
Cygne Designs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
------------------------------
August 3, July 29,
1996 1995
-------- --------
(In thousands)
OPERATING ACTIVITIES
Net (loss) $ (57) $ (9,735)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,004 2,116
Gain from sale of subsidiary, net -- (4,742)
Bad debt expense -- 1,030
Rent expense not currently payable 127 552
Amortization of intangibles 182 1,786
Income attributable to minority interests 731 821
Deferred income taxes (3) 34
Interest on Credit facility outstanding 419 --
Changes in operating assets and liabilities:
Trade accounts receivable 2,528 (1,789)
Inventory 8,080 4,818
Other receivables and prepaid expenses 3,372 2,870
Accounts payable (11,033) 7,793
Accrued expenses (2,047) (1,646)
Income taxes payable 582 (4,547)
-------- --------
Net cash provided by (used in) operating activities 3,885 (639)
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (610) (5,465)
Other assets (57) (98)
Sale of business 12,500 --
Sale of subsidiary -- (464)
Purchase of businesses, net of cash acquired -- (3,207)
-------- --------
Net cash provided by (used in) investing activities 11,833 (9,234)
-------- --------
FINANCING ACTIVITIES
Short-term borrowing, net (17,909) 2,787
Credit facility outstanding, net -- 4,034
Repayments of long-term debt, net (518) 576
Net proceeds from issuance of common stock -- 24
Investment in subsidiary by minority shareholder -- 32
-------- --------
Net cash (used in) provided by financing activities (18,427) 7,453
-------- --------
Effect of exchange rate changes on cash 37 67
-------- --------
Net decrease in cash (2,672) (2,353)
Cash at beginning of period 5,487 14,202
-------- --------
Cash at end of period $ 2,815 $ 11,849
======== ========
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 596 $ 21
Interest paid 2,123 4,328
Exchange of Company common stock for acquisitions -- 675
Retirement of Company common stock from sale of subsidiary -- 7,500
See accompanying notes.
-6-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
August 3, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis Of Presentation
The accompanying unaudited condensed consolidated financial statements of
Cygne Designs, Inc. ("Cygne") and its subsidiaries (collectively the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended August 3, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ended February 1, 1997. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 3, 1996. The
balance sheet at February 3, 1996 has been derived from the audited financial
statements at that date.
The Company's fiscal year ends on the Saturday nearest to January 31.
Earnings per share are based on the weighted average number of shares of
common stock outstanding. For the three and six months ended August 3, 1996 and
July 29, 1995, common stock equivalents are excluded as the effect of their
inclusion would be antidilutive.
2. PURCHASES AND SALES OF COMPANIES
CAT US, Inc. and C.A.T. (Far East) Limited, collectively "CAT," which began
operations in June 1992, were originally owned by the stockholders of Cygne
(80%) and AnnTaylor, Inc. (20%). Effective April 30, 1993, CAT became a 60%
owned subsidiary of Cygne with AnnTaylor, Inc. owning the remaining 40%
interest.
On May 2, 1993, the Company purchased 66% of the capital stock of JMB
Internacionale S.A. ("JMB"), a company formed to supervise manufacturing of
products in Guatemala, from an affiliate of a director of the Company. At May 2,
1993, JMB owned 50% of Modas Cisne, S.A., a manufacturing company located in
Guatemala. On October 29, 1993, JMB purchased the remaining 50% of the
outstanding stock of Modas Cisne, S.A. for future contingent payments based on
future earnings of this subsidiary.
-7-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 18, 1995, the Company purchased the remaining 34% of the capital
stock of JMB.
During 1993, in two transactions, the Company acquired T. Wear Company
S.r.l. and M.T.G.I. Textile Manufacturers Group (Israel) Limited in exchange for
an aggregate of $500,000 and 150,000 shares of the Company's common stock. These
companies design, merchandise, manufacture and sell women's apparel to customers
principally in the United States. The fair market value of the assets acquired
approximated their book value and the excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill and is being amortized
over a ten year period.
In April 1994, the Company acquired Fenn, Wright and Manson, Incorporated
("FWM"), a designer, merchandiser and manufacturer principally of private label
women's and men's apparel (the "FWM Acquisition"). The purchase price for FWM
was $44,000,000, consisting of 2,000,000 unregistered shares of the Company's
common stock and $10,000 in cash. Additional costs related to this acquisition
approximated $1,400,000. The excess of the purchase price over the fair value of
the net assets acquired of approximately $47,848,000 was recorded as goodwill,
and was being amortized over a twenty-five year period.
On April 7, 1995, the Company sold the United Kingdom subsidiary of FWM and
certain brand name rights to Fenn Wright and Manson (Antilles) N.V. (a group led
by Colin Fenn) in exchange for 600,000 shares of Cygne common stock previously
issued. In the quarter ended April 29, 1995, Cygne recorded a gain of $4,742,000
on the sale, which is net of certain restructuring expenses of $2,800,000
(consisting primarily of severance to former FWM employees and costs associated
with closing certain of FWM's facilities) pertaining to the related integration
of FWM's operations with the Company's operations. During 1995, management also
took various actions to reverse a decline in FWM's remaining business. However,
management determined that such actions were not having the desired results and
eliminated all of the operations of FWM. The unamortized goodwill recorded in
connection with the acquisition of FWM ($44,530,000) exceeded the undiscounted
anticipated future operating cash flows over the remaining goodwill amortization
period. Therefore, the FWM goodwill was written off.
In October 1994, Cygne acquired the business operations of G.J.M.
International Limited ("GJM"), a Hong Kong-based designer, merchandiser and
manufacturer of women's intimate apparel (the "GJM Acquisition"). The purchase
price for GJM was $15,200,000, consisting of 650,000 unregistered shares of the
Company's common stock, $10,000 in cash and the assumption of approximately
$1,900,000 of indebtedness owed to The Limited, Inc. The excess of the purchase
price over the fair value of the net assets acquired of approximately
$27,659,000 was recorded as goodwill and was being amortized over a twenty-five
year period.
-8-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In February 1996, the Company sold substantially all of the assets of its
GJM intimate apparel and sleepwear business (the "GJM Business") to Warnaco Inc.
(the "GJM Disposition"). In the transaction, Warnaco paid Cygne $12,500,000 in
cash and assumed certain liabilities of the GJM Business. The Company is
obligated to indemnify Warnaco for any claims for taxes arising out of the
operation of the GJM Business prior to the sale of the GJM business to Warnaco.
The Company used all the proceeds from the sale to repay outstanding senior bank
indebtedness. GJM accounted for approximately 15.6% and 13.8% of the Company's
net sales for the quarter and six months ended July 29, 1995, respectively.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sources products in Brazil for export, primarily to the U.S.
The purchase price for TSA was approximately $3,800,000, consisting of 53,038
unregistered shares of the Company's common stock and $3,100,000 in cash (the
"TSA Acquisition"). Additional costs related to this acquisition approximated
$730,000. The excess of the purchase price over the fair value of the net assets
acquired of approximately $4,500,000 was recorded as goodwill and was amortized
over a twenty-five year period. Cygne also issued options to purchase an
aggregate of 55,000 shares of the Company's common stock to the two former
shareholders of TSA in connection with their entering into consulting agreements
with TSA. In January 1996, the Company decided to cease operations of TSA by the
end of the third quarter of 1996 and wrote-off the remaining goodwill.
The FWM Acquisition, the GJM Acquisition and the TSA Acquisition were
accounted for under the purchase method and, accordingly, the operating results
of FWM, GJM and TSA were included in the consolidated operating results since
their respective dates of acquisition.
On June 7, 1996 Cygne signed a definitive agreement with AnnTaylor Stores
Corporation regarding the sale to AnnTaylor of Cygne's 60% interest in CAT, and
the assets of Cygne's AnnTaylor Woven Division that are used in sourcing
merchandise for AnnTaylor (the "AnnTaylor Disposition").
The aggregate consideration to be paid to Cygne in the transaction consists
of unregistered shares of Ann Taylor common stock having a market value of $36
million (based upon the market price of the common stock for the ten trading
days prior to closing, but in no event greater than 2.5 million shares), unless
the 2.5 million shares would have a value of less than $32.5 million, in which
event Cygne will receive Ann Taylor common stock having a market value of $32.5
million (based upon the market price of the common stock for the ten trading
days prior to closing, but in no event greater than 3 million shares and except
that Ann Taylor can pay that portion of the stock consideration in excess of 2.5
million shares in cash), and a cash payment in an amount equal to the tangible
net book value of the fixed assets of Cygne's
-9-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AnnTaylor Woven Division (but not to exceed $2,646,000) plus the tangible net
book value of the inventory of Cygne's AnnTaylor Woven Division, less the amount
of certain liabilities of the Division to be assumed by Ann Taylor.
The closing of the transaction is subject to various conditions, including
approval by the Company's stockholders, the consent and release of liens by
certain of the Company lenders, and the continuation of CAT's $40 million credit
facility. It is currently anticipated that the transaction will close in
September 1996, following approval by Cygne's stockholders. There can be no
assurance, however, that the conditions to the closing will be satisfied, that
the transaction will be consummated or, if consummated, that it will be
consummated within the currently anticipated time frame. In order to facilitate
the integration of CAT and Cygne's AnnTaylor Woven Division into AnnTaylor's
operations, Cygne has agreed to make available for a three year period the
services of Mr. Bernard Manuel, the Company's Chief Executive Officer, and Mr.
Irving Benson, the Company's President. Cygne will make available up to 30% of
Messrs. Benson's and Manuel's time and will receive an aggregate fee of $450,000
per year. AnnTaylor has agreed to register the shares issued to Cygne for
resale, although Cygne will be subject to certain restrictions on the timing of
sales and the amount of shares which can be sold at any one time. The Company is
obligated to pledge the shares of Ann Taylor common stock to its lenders. (See
note 4).
CAT and the AnnTaylor Woven Division accounted for approximately 74.5% and
73.3% of the Company's net sales for the second quarter and six months ended
August 3, 1996, respectively. If the proposed sale of CAT and the AnnTaylor
Woven Division had been consummated on February 4, 1996 and after giving effect
to the GJM Disposition, the Company would have had pro forma net sales of $19.3
million and $42.6 million for the second quarter and first six months of 1996,
respectively. Pro forma gross profit for the second quarter and first six months
of 1996 would have been $2.0 million and $4.7 million, respectively. Pro forma
loss from operations for the second quarter and first six months of 1996 would
have been $1.7 million and $3.9 million, respectively. Pro forma net loss for
the second quarter and first six months of 1996 would have been $1.8 million and
$3.7 million, respectively. The pro forma net loss per share for the second
quarter and first six months would have been $0.15 and $0.29, respectively.
-10-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVENTORY
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
Inventory consists of the following:
August 3, February 3,
1996 1996
-------- ----------
(In thousands)
Raw materials $15,328 $21,748
Finished goods 427 2,972
Finished goods-in-transit 6,182 5,279
------- --------
$21,937 $29,999
======= -------
4. CREDIT FACILITIES
The Company's finances its operations primarily through financing from
lending institutions, financing from customers and third party trade credit
facilities, cash from operations and the issuance of debt and equity securities.
During the quarter ended October 28, 1995, Cygne and CAT each entered into
a Credit Agreement with the HS Bank which modified the previous credit
arrangements with the HS Bank. The modifications included (i) the consolidation
of the facilities, previously aggregating up to $76,400,000, into one facility
of up to $70,000,000, (ii) an increase in the CAT facility from up to
$28,000,000 to up to $40,000,000, (iii) a requirement under each agreement to
comply with certain financial covenants as well as various other restrictions,
and (iv) an increase in the Cygne facility interest rate. Borrowings under these
facilities, which may be terminated by the HS Bank or the Company at any time as
to future borrowings upon proper notice, are subject to certain borrowing base
limitations and the HS Bank's agreement as to amount, purpose, interest rate,
maturity and collateral. Borrowings under these facilities are due on the
earlier of demand or the maturity date specified by the HS Bank for each
borrowing. Amounts outstanding under the Cygne agreement bear interest between
1% and 1.75% above the prime rate depending upon the working capital, as
defined, of the Company, exclusive of CAT. Amounts outstanding under the CAT
agreement bear interest at 0.5% above the prime rate. Each agreement provides
for additional interest at 2% per annum on amounts not paid when due. The HS
Bank facilities are cross guaranteed by Cygne and certain of its subsidiaries
and are secured by a first lien on substantially all the assets of the Company
including a pledge of 65% of the capital stock of certain of Cygne's foreign
subsidiaries, except for CAT (Far East) Limited as to which 60% of the capital
stock is pledged.
-11-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 15, 1996, the Company received a commitment letter from HS Bank to
provide the Company with a new credit facility to replace the existing facility.
The commitment letter provides a committed facility of up to $30 million until
the earlier of August 31, 1996 or the closing of the Ann Taylor Disposition;
thereafter the facility reduces to $22.5 million and further reduces to $15
million at October 31, 1996; $10 million at November 30, 1996; $5 million at
December 31, 1996; and matures on January 31, 1997. Borrowings under this
facility are subject to borrowing base limitations and a requirement to comply
with certain financial covenants as well as various other restrictions. The
Company is obligated to pledge substantially all of its assets, including the
AnnTaylor stock to be received at the closing of the AnnTaylor Disposition, as
security for its obligations under the credit facility. The Company intends to
use a portion of the purchase price to be received in the Ann Taylor
Disposition, including proceeds from the disposition of the Ann Taylor stock, to
repay amounts outstanding under this facility. The Company has requested the HS
Bank to postpone the August 31, 1996 initial reduction date to September 30,
1996. Although the HS Bank has indicated that it is inclined to grant the
Company's request, the HS Bank has indicated that it is also inclined to reduce
the facility to $17.5 million at the earlier of the closing of the AnnTaylor
Disposition on September 30, 1996, to $12.5 million at October 31, 1996 and to
$7.5 million at November 30, 1996. There can be no assurance the HS Bank will
agree to the Company's request. If the HS Bank does not postpone the August 31,
1996 date and requires repayment of amounts outstanding under the facility in
excess of $22.5 million, the Company may have difficulty in making, and may be
unable to make, such payment, in which event the HS Bank may declare all amounts
outstanding under the facility to be immediately due and payable. In addition,
the reduction in the amount available for borrowing under the facility prior to
consummation of the Ann Taylor Disposition could have a material adverse effect
on the Company's ability to conduct its business.
The following table sets forth information with respect to the HS Bank
facilities as of August 3, 1996:
Direct Direct
Total Borrowing Open Letters Borrowing
Facility (1) Limit (2) of Credit Outstanding
------------ --------- ------------ -----------
(In thousands)
Cygne $30,000 $30,000 $ 3,861 $15,975
CAT(3) 40,000 8,000 38,630 356
------- ------- ------- -------
Total $70,000 $38,000 $42,491 $16,331
======= ======= ======= =======
- ----------
(1) The total facility, less any direct borrowings outstanding, is available for
letters of credit.
-12-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Consists principally of revolving loans and borrowings against
imports/exports.
(3) Cygne has guaranteed 60% of the indebtedness outstanding under this facility
and AnnTaylor, Inc., which owns 40% of CAT, has provided the HS Bank with a
$4,000,000 standby letter of credit.
Certain foreign subsidiaries have credit facilities aggregating $3,255,000
at August 3, 1996. Borrowings under these facilities, which are payable on
demand, are secured by a lien on certain assets of these subsidiaries.
Cygne has agreements with two-third parties not affiliated with the
Company, but affiliated with each other, whereby these parties made available to
the Company a trade credit facility. The trade credit facility has been
suspended. At August 3, 1996, $9,364,000 of this facility was outstanding. The
Company has reached an agreement in principle to restructure the amounts
outstanding under this trade credit facility.
In addition, from time to time customers finance the purchase of raw
materials on behalf of the Company, and the Company anticipates that they will
continue to do so, although there can be no assurance of this.
5. DEBT
The Company has existing mortgages of $947,000 at August 3, 1996 relating
to a foreign office and manufacturing facility with bears interest at LIBOR plus
2% and is payable quarterly in equal payments of $52,600.
At August 3, 1996, the Company also has a $1,258,000 unsecured note payable
to The Limited, Inc., a major customer of the Company. The principal amount
outstanding, which is currently payable, bears interest at prime plus 2% and was
originally due on December 31, 1995.
At August 3, 1996, the balance outstanding on other debt was $917,000 of
which $455,000 is long-term.
6. LITIGATION
On December 11, 1995, a class action complaint was filed against the
Company, certain of the Company's officers and directors, Ernst & Young LLP, the
underwriters of the Company's June 1994 secondary public offering of stock and
certain financial analysts who followed the Company, in the United States
District Court, Southern District of New York. The action was purportedly filed
on behalf of a class
-13-
CYGNE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of purchasers of the Company's stock during the period September 28, 1993
through April 28, 1995. The complaint seeks unspecified money damages and
alleges that the Company and the other defendants violated federal securities
laws in connection with various public statements made by the Company and
certain of its officers and directors during the putative class period. On April
9, 1996, all of the defendants filed motions to dismiss the complaint. Pursuant
to a scheduling order entered by the court, the plaintiff filed oppositions to
the motions to dismiss in May 1996 and defendants filed their reply memoranda in
June 1996. The motions are currently under consideration by the court. The
Company believes that all of the allegations contained in the complaint are
without merit and intends to continue to defend the action vigorously. An
adverse decision in this action could have a material adverse effect on the
Company's financial condition and results of operations.
The Company is involved in various other legal proceedings that are
incidental to the conduct of its business, none of which the Company believes
could reasonable be expected to have a material adverse effect on the Company's
financial condition or results of operations.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise noted, all references to a year are to the fiscal year of
the Company commencing in that calendar year and ending on the Saturday nearest
January 31 of the following year.
On April 7, 1995, Cygne sold the United Kingdom subsidiary of FWM and
certain brand name rights which were acquired in the FWM Acquisition. On
February 9, 1996, the Company sold substantially all of the assets relating to
its GJM Business. In June 1996, the Company entered into a definitive agreement
to sell its 60% interest in its joint venture arrangement with AnnTaylor and the
assets of Cygne's AnnTaylor Woven Division (the "AnnTaylor Disposition").
Upon consummation of the AnnTaylor Disposition, the Company will continue
in three principal segments of the women's apparel market: career sportswear,
casual sportswear and dresses. In addition, upon the consummation of the
AnnTaylor Disposition, the Company anticipates that it will no longer have sales
to AnnTaylor. The Company has been dependent on its key customers (The Limited,
Inc. and AnnTaylor) and, with the loss of AnnTaylor as a customer, its business
is dependent upon maintaining its relationship with The Limited, Inc. and its
ability to attract new customers. However, there can be no assurance that the
Company will be able to do so. This Report contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this report and the Company's other filings with the
Securities and Exchange Commission.
General
In June 1992, the Company and certain of its stockholders formed CAT, a
joint venture arrangement with AnnTaylor to source products exclusively for
AnnTaylor. During 1992 and the first quarter of 1993, AnnTaylor owned a 20%
interest in CAT. Effective May 1, 1993, AnnTaylor's interest in CAT increased to
40%. As a result of such change in ownership, AnnTaylor has a 40% interest in
the net income of CAT, which interest is reflected in Cygne's consolidated
statements of income as "income attributable to minority interests."
On April 6, 1994, Cygne acquired FWM for a purchase price of $44.0 million,
consisting of 2,000,000 unregistered shares of the Company's common stock and
$10,000 in cash. Additional costs related to this acquisition approximated $1.4
million. The excess of the purchase price over the fair value of the net assets
acquired of $47.8 million was recorded as goodwill and was being amortized over
a twenty-five year period. In April 1995, the Company sold FWM's U.K. subsidiary
to FWM N.V. for 600,000 shares of the Company's common stock. During 1995,
management took various actions to reverse a decline in FWM's business. However,
management determined that such actions were not having the desired results and
eliminated all of
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the operations of FWM. In connection with the elimination of the FWM operations,
the Company wrote-off the remaining $44,530,000 of goodwill in fiscal 1995.
On October 7, 1994, Cygne acquired GJM for a purchase price of $15.2
million, consisting of 650,000 unregistered shares of common stock, $10,000 in
cash and the assumption of approximately $1.9 million of debt owed by GJM
International to The Limited, Inc., as well as non-compete payments aggregating
$3.2 million. Additional costs related to this acquisition approximated $1.7
million. The excess of the purchase price over the fair value of the net assets
acquired of approximately $27.7 million was recorded as goodwill and was being
amortized over a twenty-five year period.
In February 1996, the Company sold the GJM Business to Warnaco. In the
transaction, Warnaco paid Cygne $12.5 million in cash and assumed certain
liabilities of the GJM Business. The Company is obligated to indemnify Warnaco
for any claims for taxes arising out of the operation of the GJM Business prior
to the sale of the GJM Business to Warnaco. The Company used all the proceeds of
the sale to repay outstanding senior bank indebtedness.
In February 1995, Cygne acquired Tralee S.A. ("TSA"), a Uruguayan
corporation that sources products in Brazil for export, primarily to the United
States. The purchase price for TSA was approximately $3.8 million, consisting of
53,038 unregistered shares of common stock and $3.1 million in cash. Additional
costs related to this acquisition approximated $730,000. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$4.5 million was recorded as goodwill and was being amortized over a twenty-five
year period. In January 1996, the Company determined to close TSA and the
Company anticipates that operations will terminate by the end of the third
quarter of 1996. As a result, the Company recorded a loss of approximately $6.4
million in fiscal 1995, primarily resulting from the write-off of goodwill
associated with the acquisition.
In June 1996, the Company entered into the Purchase Agreement pursuant to
which Ann Taylor will, subject to, among other things, approval by the
stockholders of the Company at its Annual Meeting scheduled to be held on
September 19, 1996, acquire Cygne's 60% interest in CAT and the assets of the
Company's Ann Taylor Woven Division (the "Division") that are used in sourcing
merchandise for Ann Taylor. The purchase price to be paid by Ann Taylor to Cygne
in the transaction consists of unregistered shares of Ann Taylor Common Stock
having a market value of $36 million (based on the average of the high and low
sale price of the Ann Taylor Common Stock in the ten trading days prior to
closing), but in no event is ATSC obligated to issue more than 2.5 million
shares unless the 2.5 million shares would have a value of less than $32.5
million, in which event Cygne will receive AnnTaylor Common Stock having a
market value of $32.5 million (based on the average of the high and low sale
price of the AnnTaylor Common Stock in the ten trading days prior to closing),
but in no event more than 3 million shares (and AnnTaylor may elect to pay in
cash the portion of the stock consideration in excess of 2.5 million shares) and
a cash payment in an amount equal to the tangible net book value of the fixed
assets (but not to exceed $2,646,000) and inventory
-16-
of Cygne's Ann Taylor Woven Division, less certain assumed liabilities of the
Division.
The closing of the transaction is subject to various conditions, including
approval by the Company's stockholders, the consent and release of liens by
certain of the Company's lenders, and the continuation of CAT's $40 million
credit facility. It is currently anticipated that the transaction will close in
September 1996, following approval by Cygne's stockholders. There can be no
assurance, however, that the conditions to the closing will be satisfied, that
the transaction will be consummated or, if consummated, that it will be
consummated within the currently anticipated time frame. In order to facilitate
the integration of CAT and the Division into Ann Taylor's operations, Cygne has
agreed to make available up to 30% of Messrs. Benson's and Manuel's time and
will receive an aggregate fee of $450,000 per year. ATSC has agreed to register
the shares issued to Cygne for resale, although Cygne will be subject to certain
restrictions on the timing of sales and the amount of shares which can be sold
at any one time. The Company is obligated to pledge the shares of AnnTaylor
Common Stock to its lenders. See "-- Liquidity and Capital Resources".
During 1993, 1994, 1995 and the first half of 1996, Ann Taylor accounted
for 55.3%, 37.5%, 42.9% and 73.3% of Cygne's net sales, respectively, and The
Limited, Inc. (consisting primarily of The Limited Stores, Lerner and, in 1993,
Express) accounted for 38.6%, 36.8% and 34.1% and 17.9% of Cygne's net sales,
respectively (38.6%, 36.0% and 26.2% during 1993, 1994 and 1995, respectively,
excluding sales made by the GJM Business). Net sales in 1995 include sales to
The Limited, Inc. by the Company's FWM division which operations were
discontinued in 1995, and by the GJM Business which was sold in February 1996.
The Limited, Inc. beneficially owns through an affiliated partnership 6.9% of
the outstanding Cygne Common Stock. In addition, the Company is currently
overdue on payment of an approximately $1,258,000 unsecured note payable to The
Limited, Inc.
If the AnnTaylor Disposition had been consummated on February 4, 1996 and
after giving effect to the GJM Disposition, the Company would have had pro forma
net sales of $19.3 million and $42.6 million for the second quarter and first
six months of 1996, respectively. Pro forma gross profit for the second quarter
and first six months of 1996 would have been $2.0 million and $4.7 million,
respectively. Pro forma loss from operations for the second quarter and first
six months of 1996 would have been $1.7 million and $3.9 million, respectively.
Pro forma net loss for the second quarter and first six months of 1996 would
have been $1.8 million and $3.7 million, respectively. The pro forma net loss
per share for the second quarter and first six months would have been $0.15 and
$0.29, respectively.
Although Cygne has long established relationships with its key customers,
Cygne does not have long-term contracts with any of its customers, including The
Limited, Inc. Upon the consummation of the AnnTaylor Disposition, the Company
anticipates that it will no longer have sales to Ann Taylor. The Company has
been dependent on its key customers and with the loss of Ann Taylor as a
customer, its future success will be dependent upon its ability to attract new
customers. There can be no assurance that The Limited, Inc. will continue to
purchase merchandise from the
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Company at the same rate in the future, or that the Company will be able to
attract new customers. In addition, as a result of the Company's dependence on
The Limited, Inc., particularly after the AnnTaylor Disposition, The Limited,
Inc. has the ability to exert significant control over the Company's business
decisions, including prices. Furthermore, The Limited, Inc. procures directly a
substantial portion, but not a majority, of its product requirements through its
sourcing subsidiary, and such subsidiary will continue to be a major competitor
of the Company with respect to the Company's business with The Limited, Inc. In
addition, The Limited Stores, which is the Company's largest customer among the
divisions of The Limited, Inc. has formed an internal design and product
development group as well as added a direct sourcing department. During 1995,
sales to certain divisions of The Limited, Inc. decreased significantly and the
Company anticipates that sales to The Limited, Inc. will continue to decrease in
1996.
The apparel industry historically has been subject to substantial cyclical
variation, with purchases of apparel and related goods tending to decline during
recessionary periods when disposable income is low. This could have a material
adverse effect on the Company's business. The Company believes that the weakness
of retail sales of women's apparel in 1994 and 1995 adversely affected its
operating results, and believes that its operating results will continue to be
adversely affected as long as this weakness continues. In addition, various
retailers, including some of Cygne's customers, have experienced financial
difficulties during recent years which have increased the risk of extending
credit to such retailers.
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RESULTS OF OPERATIONS
Financial Summary
Certain captions of the Condensed Consolidated Statements of Operations for
the three months ended May 4, 1996 and April 29, 1995 expressed as a percentage
of net sales are as follows:
Three Months Ended Six Months Ended
----------------------------- --------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
-------- -------- -------- ------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 12.7 9.6 12.8 9.1
Selling, general and administrative
expenses 10.7 12.2 10.9 13.2
Amortization of intangibles 0.1 0.7 0.1 0.7
Income (loss) from operations 1.9 (3.4) 1.8 (3.4)
Interest expense 1.3 1.9 1.2 1.8
Net income (loss) (0.1) (3.8) 0.0 (3.7)
Net Sales
Net sales for the second quarter of 1996 were $75.9 million, a decrease of
$56.2 million or 42.5% from the comparable period in 1995. Net sales for the
first six months of 1996 were $159.6 million, a decrease of $100.8 million or
38.7% from the comparable period in 1995. The decreases in net sales for the
second quarter and six months were primarily attributable to the sale of the GJM
Business on February 9, 1996, which generated sales of $20.6 million and $36.0
million, respectively, in the comparable 1995 periods, discontinued customers
and product lines, which generated sales of $28.5 million and $66.5 million,
respectively, in the comparable 1995 periods and decreases in sales to The
Limited, Inc. of $10.5 million and $4.8 million, respectively.
For the second quarter and first six months of 1996 CAT and the Division
had combined net sales to Ann Taylor of $56.6 million and $117.1 million, or
74.5% and 73.3% of the Company' net sales, respectively, and Cygne's share of
the combined net income of CAT and the Division for these periods was $1.5
million and $3.2 million, respectively. Upon consummation of the AnnTaylor
Disposition, the Company anticipates that it will no longer have sales to Ann
Taylor.
Gross Profit
Gross profit for the second quarter of 1996 was $9.7 million, a decrease of
$3.0 million or 23.7% from the comparable period in 1995. Gross profit for the
first six months of 1996 was $20.4 million, a decrease of $3.4 million or 14.4%
from the comparable period in 1995. Gross margins as a percentage of net sales
for the second quarter and six months of
-19-
1996 increased over the comparable prior periods due to lower margins on sales
to discontinued and GJM customers in 1995. Certain of the Company's products
inherently carry lower gross margins than the woven products. The Company
expects that gross profit as a percentage of net sales will vary from quarter to
quarter depending on the mix of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the second quarter of 1996
were $8.1 million, representing a decrease of 49.4% over the second quarter of
1995. Selling, general and administrative expenses for the first six months of
1996 were $17.3 million, representing a decrease of 49.5% over the comparable
prior year period. The decrease in these expenses was primarily attributable to
reductions in the Company's overhead as well as the elimination of the FWM
operations and the disposition of the GJM Business.
Bad Debt Expenses
Bad debt expense of $1.1 million in the first quarter of 1995 resulted from
the bankruptcy filing of a customer.
Amortization of Intangibles
The amortization of intangibles for the second quarter of 1996 was $91,000,
a decrease of $874,000 over the second quarter of 1995. The amortization for the
first six months of 1996 was $182,000, a decrease of $1.7 million over the first
six months of 1995. The decrease was primarily attributable to the write offs
subsequent to the first quarter of 1995 of intangibles recorded in connection
with the FWM Acquisition and the GJM Acquisition.
Interest Expense
Interest expense for the second quarter of 1996 was $1.0 million, a
decrease of $1.5 million or 59.8% over the comparable prior year period.
Interest expense for the first six months of 1996 was $1.9 million, a decrease
of $2.7 million or 58.0% over the comparable prior year period. The decrease in
the interest expense is primarily attributable to the reduction in anticipation
taken by customers and the sale of the GJM Business.
Provision for Income Taxes
The provision for income taxes in the second quarter and six months of 1996
primarily represents tax on CAT's income. At February 3, 1996, the Company had
net operating loss carryforwards of approximately $84 million, which may be used
to offset future taxable income.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's finances its operations primarily through financing from
lending institutions, financing from customers and third party trade credit
facilities, cash from operations and the issuance of debt and equity securities.
During the quarter ended October 28, 1995, Cygne and CAT each entered into
a Credit Agreement with the HS Bank which modified the previous credit
arrangement with the HS Bank. The modifications included (i) the consolidation
of the Cygne, FWM and GJM facilities, previously aggregating up to $76.4
million, into one facility of up to $70.0 million, (ii) an increase in the CAT
facility from up to $28.0 million to up to $40.0 million, (iii) a requirement
under each agreement to comply with certain financial covenants as well as
various other restrictions, (iv) an increase in the Cygne facility interest rate
and (v) the elimination of the requirement to maintain a certain certificate of
deposit as additional security for the prior separate GJM credit facility.
Borrowings under these facilities, which may be terminated by the HS Bank or the
Company at any time as to future borrowings upon proper notice, are subject to
certain borrowing base limitations and the HS Bank's agreement as to amount,
purpose, interest rate, maturity and collateral. Borrowings under these
facilities are due on the earlier of demand or the maturity date specified by
the HS Bank for each borrowing. Amounts outstanding under the Cygne agreement
bear interest between 1% and 1.75% above the prime rate depending upon the
working capital, as defined, of the Company, exclusive of CAT. Amounts
outstanding under the CAT agreement bear interest at 0.5% above the prime rate.
Each agreement provides for additional interest at 2% per annum on amounts not
paid when due. The HS Bank facilities are cross guaranteed by Cygne and certain
of its subsidiaries and are secured by a first lien on substantially all the
assets of the Company including a pledge of 65% of the capital stock of certain
of Cygne's foreign subsidiaries, except for CAT (Far East) Limited as to which
60% of the capital stock is pledged.
On May 15, 1996, the Company received a commitment letter from HS Bank to
provide the Company with a new credit facility to replace the existing facility.
The commitment letter provides a committed facility of up to $30 million until
the earlier of August 31, 1996 or the closing of the AnnTaylor Disposition;
thereafter the facility reduces to $22.5 million and further reduces to $15
million at October 31, 1996; $10 million at November 30, 1996; $5 million at
December 31, 1996; and matures on January 31, 1997. Borrowings under this
facility are subject to borrowing base limitations. The Company is obligated to
pledge substantially all of its assets, including the AnnTaylor stock to be
received at the closing of the AnnTaylor Disposition as security for its
obligations under the credit facility. The Company intends to use a portion of
the purchase price to be received in the Ann Taylor Disposition, including
proceeds from the disposition of the AnnTaylor stock, to repay amounts
outstanding under this facility. The Company has requested the HS Bank to
postpone the August 31, 1996 initial reduction date to September 30, 1996.
Although the HS Bank has indicated that it is inclined to grant the Company's
request, the HS Bank has indicated that it is also inclined to reduce the
facility to $17.5 million at the earlier of the closing of the AnnTaylor
Disposition on September 30, 1996, to $12.5 million at October 31, 1996 and to
$7.5 million at November 30, 1996. There can be no assurance the HS Bank will
agree to the Company's request. If the HS Bank does not postpone the August 31,
1996 date and requires repayment of amounts outstanding under the facility in
excess of $22.5 million, the Company may have difficulty in making, and may be
unable to make, such payment, in which
-21-
event the HS Bank may declare all amounts outstanding under the facility to be
immediately due and payable. In addition, the reduction in the amount available
for borrowing under the facility prior to consummation of the Ann Taylor
Disposition could have a material adverse effect on the Company's ability to
conduct its business.
The following table sets forth information with respect to the HS Bank
facilities as of August 3, 1996:
Direct Direct
Total Borrowing Open Letters Borrowing
Facility (1) Limit (2) of Credit Outstanding
------------ --------- ----------- -----------
(In thousands)
Cygne $30,000 $30,000 $ 3,861 $15,975
CAT(3) 40,000 8,000 38,630 356
------- ------- ------- -------
Total $70,000 $38,000 $42,491 $16,331
======= ======= ------- -------
- ----------
(1) The total facility, less any direct borrowings outstanding, is available for
letters of credit.
(2) Consists principally of revolving loans and borrowings against
imports/exports.
(3) Cygne has guaranteed 60% of the indebtedness outstanding under this facility
and AnnTaylor, Inc., which owns 40% of CAT, has provided the HS Bank with a
$4,000,000 standby letter of credit.
Certain foreign subsidiaries have credit facilities aggregating $3,255,000
at August 3, 1996. Borrowings under these facilities, which are payable on
demand, are secured by a lien on certain assets of these subsidiaries.
Cygne has agreements with two-third parties not affiliated with the
Company, but affiliated with each other, whereby these parties made available to
the Company a trade credit facility. The trade credit facility has been
suspended. At August 3, 1996, $9,364,000 of this facility was outstanding. The
Company has reached an agreement in principle to restructure the amounts
outstanding under this trade credit facility.
In addition, from time to time customers finance the purchase of raw
materials on behalf of the Company, and the Company anticipates that they will
continue to do so, although there can be no assurance of this.
Net cash provided by operating activities for the six months ended August
3, 1996 was $3.9 million. The net cash provided resulted primarily from
decreases in accounts receivable and inventory offset by a decrease in accounts
payable. Net additions to fixed
-22-
assets aggregated approximately $600,000 for the six months of 1996.
As discussed above, the financing of the Company's operations currently
depends primarily upon financing provided by the HS Bank, the Company's
customers and to a lesser extent, third party vendors. As a result of the
Company not being in compliance with financial covenants in its HS Bank credit
facility and the liquidity pressures faced by the Company, third party vendors
have been less willing to extend credit to the Company than in prior years.
Although the HS Bank has waived the defaults, there can be no assurance that
such third party vendors will continue to extend credit to the Company.
During 1995 and the first half of 1996, the Company experienced liquidity
pressures primarily as a result of the negative cash flow caused by the
Company's operating losses. The Company believes that its current financing
arrangement with the HS Bank and the proceeds from the AnnTaylor Disposition
will alleviate the liquidity pressures faced by the Company during 1995 and the
first half of 1996. However, there can be no assurance that the AnnTaylor
Disposition will occur or that the new credit facility will not be terminated.
If the AnnTaylor Disposition does not occur or the new credit facility is
terminated the Company will face the liquidity pressures previously experienced
which would adversely affect the Company's financial condition and results of
operations. The Company expects to seek a new bank facility to replace the HS
Bank Facility. There can be no assurance that the Company will be able to
replace the HS Bank Facility. If the Company is unable to replace the HS Bank
Facility, its financial condition and results of operations could be adversely
affected.
Tax Audits
The Company is subject to ongoing tax audits in several jurisdictions.
Although there can be no assurances, the Company believes any adjustments that
may arise as a result of these audits will not have a material adverse effect on
the Company's financial position.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Stock and Asset Purchase Agreement, dated as of June 7, 1996,
as amended as of August 27, 1996, by and between Cygne Designs,
Inc., Cygne Group (F.E.) Limited, AnnTaylor Stores Corporation
and Ann Taylor, Inc.
10.2 License Agreement, dated as of July 26, 1996, by and between
Cygne Designs, Inc. and Kenzo S.A. pertaining to the KENZO
STUDIO license.
10.3 License Agreement, dated as of July 26, 1996, by and between
Cygne Designs, Inc. and Kenzo S.A. pertaining to the KENZO
JEANS license.
27 Financial Data Schedule (for SEC use only)
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b. Reports on Form 8-K
None.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYGNE DESIGNS, INC.
(Registrant)
September 16, 1996 By: /s/ Bernard M. Manuel
---------------------------------------
Bernard M. Manuel, Chairman of the
Board and Chief Executive Officer
September 16, 1996 By: /s/ Roy E. Green
---------------------------------------
Roy E. Green, Senior Vice President,
Chief Financial Officer and Treasurer
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